“One of the reasons for this lack of homogeneity in hedge fund index return data is that none of these existing indices is fully representative. In other words, this is a sampling problem: a number of funds that should be part of an index are not included in the index. Because of the lack of regulation on hedge fund performance disclosure, existing databases cover only a relatively small fraction of the hedge fund population. It is likely that only slightly more than half of existing hedge funds choose to self-report their performance to one of the major hedge fund databases.”

Regular readers may remember this illustration from the London Business School which makes the same point graphically (see related posting):